Banking Sector Development, Inflation and Economic Growth in Asian Countries: A Panel Causality and Co-Integration Approach

Muhammad Rizwan Nazir ,Ifran Khan,Rehana Tabassam

doi:10.5296/ijafr.v8i4.14046

Muhammad Rizwan Nazir , Ifran Khan + Show 1 more

Open Access

https://doi.org/10.5296/ijafr.v8i4.14046

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Abstract

This study investigates the causal relationship between banking sector development, inflation, and economic growth for six Asian countries (Bangladesh, China, India, Malaysia, Pakistan and Sri Lanka) over the period of 1970-2016. Using a Pedroni panel, Kao co-integration test, Panel Granger causality-based Error Correction Model, Dynamic ordinary least square (DOLS), and Fully modified ordinary least square (FMOLS), this study finds that the development of the banking sector generally has a positive relationship with economic growth in the long-run. This results show that in the long-run, monetary policy play a vital role in the economic growth. This study also confirmed the response causality between the indicators of banking sector development and economic growth. Based on the empirical findings, this research provides important policy implications to the banking sector and economic supervisory bodies in order to achieve the long run economic growth.

Highlights

The global economy has experienced the extraordinary change over the last three decades, in part motorized by prompt expansions in and transmission of information and communication technology (ICT) across the world
This study investigates the causal relationship between banking sector development, inflation, and economic growth for six Asian countries (Bangladesh, China, India, Malaysia, Pakistan and Sri Lanka) over the period of 1970-2016
Using a Pedroni panel, Kao co-integration test, Panel Granger causality-based Error Correction Model, Dynamic ordinary least square (DOLS), and Fully modified ordinary least square (FMOLS), this study finds that the development of the banking sector generally has a positive relationship with economic growth in the long-run

Summary

Introduction

The global economy has experienced the extraordinary change over the last three decades, in part motorized by prompt expansions in and transmission of information and communication technology (ICT) across the world These elements of ICT innovations have empowered the main regions of the economy and countries across the world to be more independent and interlocking on one another. The inter-locking of regions and countries posture their individual challenges in that, any instability in one economy has the potential to resonate across the other regions of the economy which may lead to a contagion outcome It is well recognized in the literature of finance growth that financial expansions contribute to the growth of the economy by direct and indirect networks. It supports to ascertain a profitable business opportunities and to develop the corporate governance (Levine 2005)

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